Working Paper: CEPR ID: DP14936
Authors: Christel Karsten; Ulrike M. Malmendier; Zacharias Sautner
Abstract: Using unique data on company acquisition contracts, we document significant variation in contracts depending on the expertise of the negotiating parties. Lawyers with higher expertise relative to their counterparties negotiate better risk allocation for their clients and more favorable target prices, after controlling for the deal environment, the quality of financial advisors, and other features of the contract design. The benefits of high expertise appear to outweigh its costs, largely because high-expertise lawyers economize on transaction costs by shortening negotiation times. Our findings help explain the importance of league tables and variation in legal fees in the M&A industry.
Keywords: lawyer expertise; contract design; M&A negotiations
JEL Codes: D86; G34; K12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| relative buyer-lawyer expertise (K39) | risk allocation in contracts (D86) |
| relative buyer-lawyer expertise (K39) | likelihood of warranty breaches not needing to be material (L14) |
| relative buyer-lawyer expertise (K39) | probability of including a MAC clause in contracts (D86) |
| relative buyer-lawyer expertise (K39) | likelihood of delivering the first draft of a contract (K12) |
| relative buyer-lawyer expertise (K39) | closing times (G14) |
| relative buyer-lawyer expertise (K39) | negotiation index (C78) |